B-Corps: How businesses can do well and do good
You purchase free-range eggs and carry them home in a cloth grocery bag. You will not invest in companies that exploit workers. You could make more money if you worked elsewhere, but you like your employer’s commitment to the community. As a stereotypical Madisonian, you try to make a positive impact by supporting “good companies.” However, it is not just Madison consumers who use their purchasing power to punish bad actors or reward companies that address social or environmental issues. But who is making the green grade, and who is just greenwashing?
The answer may be in a new law that has been enacted in over a dozen states, including Illinois, New York, and South Carolina. The law creates the Benefit Corporation (B-Corp), an enterprise hybrid of a traditional for-profit and a nonprofit. B-Corps allow businesses to voluntarily focus on achieving a different standard of corporate purpose in addition to making money. The theory is that business is more nimble than government and the most powerful man-made force on the planet, so its dynamism should be used to benefit both society and shareholders. Successful B-Corps include Patagonia clothing outfitter, Etsy e-commerce, and Seventh Generation cleaning supplies.
While laws vary from state to state, in every case the B-Corp has all the rights and responsibilities of a typical corporation, but with added obligations: 1) a material, positive impact on society and the environment, 2) an annual requirement to report its social and environmental performance. B-Corps are not treated any differently under the tax code, and nothing prevents a non-B-Corp from pursuing and publicizing whatever social benefit its management or owner desires. Even so, terms like “responsible” and “sustainable” are used so often and interchangeably by businesses these days that they often lose their meaning. The B-Corp model may appeal to businesses as a cost-effective method to differentiate themselves in the minds of customers, investors, and employees.
Some of the advantages of the B-Corp are:
- Low barrier to entry: It can cost thousands of dollars to achieve third-party designations like Fair Trade or LEED, and they often require a laborious accreditation process, which may be too time- and cost-prohibitive for a start up or small business. Since the B-Corp is a creature of statute, it is no more expensive to establish than any other corporation, and it does not require a governance structure such as a controlling foundation. As a result, it is as comprehensive and flexible as any other corporate legal entity.
- Investor appeal: Generally, institutional investors prefer corporate structure to LLCs. B-Corps attract socially responsible investors seeking opportunities that either align with their values or that will promote social change as an end in itself. Even mainstream funds find B-Corps fit nicely within portfolios because of the fear of potential penalties and liabilities associated with poor social or environmental performance.
- Management focus: The belief among B-Corp proponents is that a typical board of directors’ default position is to maximize shareholder returns above all else. This, combined with the risk of shareholder lawsuits, has a chilling effect on a corporation’s social mission, especially during tough economic times like the Great Recession. Even though current Wisconsin law provides corporations’ boards of directors with a great deal of leeway in their decision-making, spelling out a B-Corp’s social mission in its legal structure provides directors and officers with clarity about their priorities.
- Legacy protection: This problem of locking in a corporation’s double bottom line has not been solved by existing business forms. B-Corps require a two-thirds vote of shareholders to opt out of the social obligations. As a result, it does not matter if the new boss is the same as the old boss, because she or he will be required to act as the old boss.
B-Corp legislation has been introduced in the Wisconsin Legislature, but it has not been passed into law. It is unknown whether this is a priority for either party, or if a Wisconsin B-Corp would change the way business is conducted in the Dairy State. While every corporation can benefit society by hiring employees and paying taxes, corporate law has not been structured to address for-profits seeking to use the power of business to solve social problems. Consumers, employees, and investors have identified companies’ social responsibility as an increasingly important factor. All the same, the Wisconsin B-Corp would free a corporation from needing to choose between doing well and turning a buck.
John J. Schulze, J.D., is an adjunct professor at Marian University and Upper Iowa University, where he teaches business ethics and international business.